'Must Do Justice By Promoting Honesty': Karnataka HC Directs SBI To Refund Forfeited Amount Over Failure To Disclose Encumbrance On Auction Property

The Karnataka High Court has directed State Bank Of India to refund the amount forfeited by it from a prospective purchaser of a property being sold under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) as it did not disclose that title of the subject property was not with the original borrower of the loan. A single judge bench of Justice P Krishna Bhat directed the bank to refund the amount of Rs.24,10,000/- to the petitioner with interest @ 8% p.a. from 15.11.2010 till the date of payment. Case details: One Jignesh N. Patel was the owner of immovable property in question. He obtained a loan from SBI, Mysore for his business and by way of security he created a mortgage on the aforementioned property. The loan having remained outstanding, SBI initiated proceedings and took over possession of the mortgaged property. The property was brought to sale for the recovery of outstanding loan. In this regard a newspaper publication was issued by SBI. The petitioner, having noticed the same, deposited Rs.5,63,500 earnest money and submitted his sealed tender. Same was accepted, for a sum of Rs.56,40,000. Accordingly, the petitioner was directed to deposit 25% of the amount on the same date, which was inclusive of EMD amount already deposited by him. Thus, he deposited a sum of Rs.24,10,000. Further, as per a communication of SBI, the petitioner was required to deposit the balance amount of Rs.42,30,000 by 30.11.2010. When he made enquiries in the Office of jurisdictional Sub-Registrar, he came to know that borrower had even before the sale notification alienated the property concerned in favour of his wife, Naina J Patel, by executing a registered gift deed. Therefore, petitioner made a representation to SBI to get the gift deed annulled so as to avoid any dispute regarding the title of property. However, SBI refused to do so and insisted on the petitioner to make full payment and subsequently forfeited the amount of Rs.24,10,000 deposited by the petitioner. Before the High Court, the Petitioner argued that SBI suppressed the fact in the sale notification that borrower was not having title over the property. The liability of borrower to SBI was settled between them by means of One Time Settlement (OTS) and borrower has paid the same and the account was closed. Thus, SBI has not suffered any loss or damage on account of non-deposit of balance amount by the petitioner. The Bank opposed the plea, claiming that as per terms of the sale notification inviting tenders, successful bidder cannot retreat from the auction after the bid is completed. It was open to the petitioner to make his own inspection/ enquiries about the property and there was no suppression of any material facts about the property that was sold under the provisions of the SARFAESI Act. Further, it was said subsequent events of the settlement of loan account by OTS cannot be considered by the Court and on the said basis the refund of Rs.24.10 lakhs deposited by the petitioner cannot be ordered. Finally it was argued that under Section 13 of the SARFAESI Act, the purchaser like the petitioner would have got full title on the property purchased and therefore petitioner ought to have deposited the entire sale price and since he has not deposited the amount, this Court cannot direct refund of the amount as prayed for. Court findings: Firstly, the court referred to Rule 8 of the Security Interest (Enforcement) Rules, 2002 and said that the requirement of furnishing details of encumbrances known to the secured creditor applies not only to website publication of sale and but also to newspaper publication. The Court also rejected Bank's contention had no knowledge of the gift deed inasmuch as the Bank had not denied the assertion made by Petitioner that it was a party to the suit filed by Naina Patel. Further the court observed, "This clearly shows that on account of Smt.Naina J Patel filing W.P.No.122/2008, respondent No.1 was clearly aware that Sri.Jignesh N. Patel had transferred the title in her favour. Inspite of the same, respondent No.1 did not mention this very material aspect regarding title to the property brought for sale in the sale notice issued. Then it held, "Petitioner, therefore, was fully entitled to protect his interest and in view of deliberate suppression of the material facts made by respondent No.1, he did not deposit the full sale price and in such circumstances, respondent No.1 was not justified in forfeiting the amount deposited by the petitioner." The bench opined, "Courts must do justice by the promotion of honesty and good faith, as far as it lies in their power…a different conclusion would be 'opposed to what is reasonable, to what is probable, and to what is fair'." The court also took into account that the loan account has been settled. It said, "Since...

'Must Do Justice By Promoting Honesty': Karnataka HC Directs SBI To Refund Forfeited Amount Over Failure To Disclose Encumbrance On Auction Property

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'Must Do Justice By Promoting Honesty': Karnataka HC Directs SBI To Refund Forfeited Amount Over Failure To Disclose Encumbrance On Auction Property

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